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BY JON DRIEDGER
Amouseamongelephants
IT’S OFTEN SAID THAT WEATHER
and government policy are the two big-
gest influences on grain prices. Weather
obviously drives the supply side of the
equation. And, as with most industries,
government policy permeates all aspects
of agriculture. Often, this shows up in sub-
tle ways, like when crop insurance levels,
transportation policy or biofuel mandates
affect decision-making and prices. More
dramatic market impacts are felt when, for
example, a foreign government suddenly
closes its door on Canadian grain.
In some ways, currencies reflect a
country’s government policy. Curren-
cy values show the collective market
opinion around economic health, fiscal
sustainability, inflation and interest rate
outlooks as well as the balance of trade.
The currency value is especially relevant
for a country like Canada that is heavily
dependent on commodity exports.
Foreign exchange rates are critical in
determining the value farmers get for
their grain. The market will only give
you what someone else is willing to pay
for that grain, less the cost of getting it
there. End-use destinations see the price
in their own local currency terms. They
are largely indifferent to the strength of
the Canadian dollar, and the ensuring
effects on a Prairie farmer’s return. This
is particularly the case in markets that
are especially price sensitive and/or for
crops that must compete against other
exporting countries. As a result, red lentil
sales to India or malt barley shipments to
China may be relatively more impacted by
the value of the loonie than, for example,
canola volumes to Japan. It’s also impor-
tant to remember that most international
transactions are done in U.S. dollars, so
exports from Canada to a country other
than the United States require a currency
conversion on both ends.
The attention placed on the role of
the loonie in local prices becomes more
pronounced when foreign exchange rates
are more volatile. Summer and fall 2017
was a prime example, when the Canadi-
an dollar rallied sharply against the U.S.
dollar and then pulled back. The fact
that the loonie reached its height while
grain prices were coming under pressure
due to their own bearish influences only
shrank the bids further.
The challenge with currency markets
is that they are as unpredictable as any
other market. Analysts continually miss
key turning points, while some of the lofty
projections for extreme lows or peaks nev-
er materialize. It’s easy to dismiss these
forecasts in hindsight, but they reflect the
difficulty in predicting these markets.
The uncertainty in currency markets
is only going to increase. Global central
bankers are working through the biggest
monetary policy experiment in history
with their ultra-low interest rates and
bloated balance sheets. Rates are being
nudged higher, but no one can predict
how things will unfold. The world also
faces geopolitical uncertainty and political
unpredictability. The range of potential
outcomes in the current environment is
often described as having “fatter tails,”
reflecting the fact that we are in a time
when unusual scenarios seem more plausi-
ble than they often have in the past.
To an extent, the Canadian dollar may
also be a mouse among elephants in the
context of global currency and financial
markets. If we’re to see major shifts in the
U.S. dollar or the euro, or a sudden swing
in interest rates and bond markets, it’s
possible the loonie may be tossed around
on the financial waves.
How should a Prairie grain farmer nav-
igate this foreign exchange uncertainty?
The same way one evaluates every other
market that affects one’s business. Be
aware of what is happening in currency
markets, but don’t base a marketing plan
on the ability to confidently forecast the
future. Understand how a shifting loonie
may impact the farm-gate price for the
crops that you grow, and manage your risk
accordingly. Consider a hedging strategy
or other ways to lock in the value of the
Canadian dollar if a big swing may have a
negative impact on your margins.
But remember that the currency will
likely have a relatively smaller impact on
the price of your crop than the rest of the
supply and demand fundamentals. And
above all, don’t let the market noise derail
a well-crafted marketing plan.
Jon Driedger is a senior market analyst
with FarmLink Marketing Solutions.
THE LOONIE AND PRAIRIEGRAINPRICES ARE INFLUENCEDBYOUTSIDE FORCES
MARKET
MONITOR
Winter
2018
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